Best and Worst ETFs of 2012

by Will Ashworth | December 27, 2012 8:00 am

[1]It’s that time of year, folks, and I’m not talking about the holidays. No, it’s the annual tally-up-the-scorecard ritual for those of us who write about investments. This year I’ve been given the task of declaring the winners and losers in exchange-traded funds and identifying any trends developing for 2013.

Winners

In an effort to address as wide an ETF-investing audience as possible, I’ve eliminated leverage, inverse and single-country funds from contention. While they might suit a certain specific segment of the investing population, they aren’t generally recommended for the average person because of their inherent additional risk

Not a big surprise that an ETF related to homebuilding was the best performer in 2012. This iShares fund invests 63% of its $1.6 billion in total net assets in home construction stocks with Pulte Group (NYSE:PHM[3]), Lennar (NYSE:LEN[4]) and DR Horton (NYSE:DHI[5]) its three largest holdings. As of Dec. 24, it was up 76.8% on the year. It’s safe to say the housing recovery is real.

Second Prize: Van Eck Market Vectors Biotech ETF (NYSE:BBH[6])

This isn’t something most prognosticators would have expected heading into 2012, but then again I don’t write about biotechnology, so I’m negatively biased. Biotech stocks gained favor with investors in 2012 as the aging population combined with new product introductions made many biotech firms irresistible to Big Pharma. The same trends that appeared this year will likely carry on in 2013. The Market Vectors fund was up 47.8% year-to-date through Dec. 24.

It was indeed a good year for the big banks. The iShares fund was up 32.9% year-to-date as of Dec. 24. The IYG is 58% invested in banks, with Wells Fargo (NYSE:WFC[8]), JPMorgan Chase (NYSE:JPM[9]) and Bank of America (NYSE:BAC[10]) accounting for 30.8% of its 112-stock portfolio. The remaining top 10 holdings account for another 30.9% of the $350 million in total net assets. Experts predict more good news for financial services in 2013.

Honorable Mention: Vanguard S&P 500 ETF (NYSE:VOO[11])

Of the broad-based index funds, Vanguard’s version, which replicates the performance of the S&P 500 stock index, was up 15.15% year-to-date as of Dec. 24. Until recently, it was exactly identical to the total return for the index itself. The SPDR S&P 500 (NYSE:SPY[12]), which has a much larger asset base than the VOO, has a year-to-date return that is slightly lower. By charging four basis points less than the SPY, the VOO has been able to eke out a better return in 2012.

Losers

Believe it or not, there weren’t too many ETFs with assets of at least $100 million that were in the red in 2012. However, I was able to find a few that didn’t move with the overall markets. If you owned any of these you have my sympathies.

First Booby Prize: U.S. Natural Gas Fund (NYSE:UNG[13])

This fund has a straightforward task — to replicate the performance of natural gas prices. In 2012, they were down once again. As a result, the $1.2 billion fund has lost 26.1% year-to-date through Dec. 24. The end of 2012 will bring the fifth consecutive year of losses for the fund, which got its start in April 2007. Many experts see the increased use of natural gas in power generation as an indication natural gas prices have bottomed. If so, 2013 could be the start of a bull market.

Second Booby Prize: Van Eck Market Vectors Coal ETF (NYSE:KOL[14])

Coal is currently suffering from an image problem in this country. Its dirtiness makes it far less attractive than natural gas, especially with gas prices having plummeted in the past four years due to increased supply. That cycle appears to be coming to an end, with places like China thirsty for coal — dirty or clean. Its year-to-date performance — down 23.7% — through Dec. 24 isn’t great when you factor in a 30.7% decline in 2011. Will coal go for a third year of losses in 2013?

Third Booby Prize: PowerShares WilderHill Clean Energy (NYSE:PBW[15])

What exactly is WilderHill? It’s a California-based index provider dedicated to the cause of cleaner energy. Its index tends to favor pure-play companies in wind, solar and other forms of renewable energy. Down 17.2% year-to-date through Dec., clean energy clearly has a way to go before investors will benefit financially. Over the last five years, this fund is down almost 31% on an annualized basis. Those kinds of numbers will definitely scare away investors.

Takeaways From 2012

The big winners and losers from this past year were industry-centric. While broad-based index funds like the VOO and SPY performed more than adequately, the big returns (and losses) came from betting on a particular industry’s success — never an easy thing to do. However, it looks as though the same thing will happen in 2013. Therefore, my big takeaway from 2012 is to ride the momentum of financial services and home construction all the way through 2013 into 2014.

As of this writing, Will Ashworth didn’t own any securities mentioned here.